Theme and Background
This chapter serves as the introduction to Cobas’s first-quarter 2019 report, primarily discussing the fund’s rebound in early 2019 after negative returns in 2018, and the fund manager’s sustained optimism about the potential for portfolio holdings to be revalued. The report emphasizes that despite short-term market volatility, the fund manager’s confidence in the target price has actually strengthened over time through in-depth research (spending 90-95% of their time).
Core Thesis
The author’s core investment argument is: The portfolio remains significantly undervalued, and as understanding of the holdings deepens, the certainty of achieving the target price is increasing. The counterintuitive judgment is that the negative returns in 2018 did not shake confidence; instead, value-releasing actions by companies, such as buybacks and mergers, have made the fund manager more certain of the target price. Meanwhile, the modest market rebound has yet to reflect the portfolio’s true potential.
Key Arguments and Data
- Q1 2019 Rebound: The International Portfolio returned +10.8% for the quarter, and the Iberian Portfolio returned +8.3%, primarily driven by stocks that underperformed in 2018 (Aryzta +25%, Teekay LNG +36%, Teekay Corp +17%, Dixons +22%).
- Increased Target Price Confidence: The International Portfolio’s target price is €173 per share, implying 116% upside. The Iberian Portfolio’s target price is €178 per share, implying 74% upside. Since the inception of the Iberian Fund, the target price has been revised up by a cumulative 34%.
- Research Commitment: The fund manager spends 90-95% of their time continuously researching portfolio companies, believing that the longer the time horizon, the deeper the understanding (analogous to a marriage).
- Historical Case: Thales, when its share price was €28 in 2011, was valued by the fund manager at €56. The current share price of €107 validates this long-term judgment.
- Portfolio Quality: The International Portfolio has an estimated 2019 P/E of 7.9x and an ROCE of 25% (33% excluding shipping and raw materials companies). The Iberian Portfolio has a P/E of 9.4x and an ROCE of 28%.
Comparative Data Table:
| Metric |
International Portfolio |
Iberian Portfolio |
| Q1 2019 Return |
+10.8% |
+8.3% |
| Benchmark Return for Period |
+12.8% (MSCI Europe) |
+9.1% |
| Cumulative Return Since Inception |
-19.7% |
+2.7% (outperforming benchmark) |
| Target Price Upside |
116% |
74% |
| Estimated 2019 P/E |
7.9x |
9.4x |
| ROCE |
25% (33% excluding some) |
28% |
| Position Sizing |
Close to 99% |
Close to 99% |
Companies/Assets Involved
- Aryzta: Up +25% in Q1, contributed +2.5% to the International Portfolio, bullish.
- Teekay LNG: Up +36% in Q1, contributed +1.9%, and the company is releasing value through share buybacks, bullish.
- Teekay Corp: Up +17% in Q1, bullish.
- Dixons Carphone: Up +22% in Q1, contributed +1.0%, bullish.
- Saipem: New addition to the International Portfolio in Q1, a global leader in oil and gas engineering, trading at 7x earnings with an ROCE comparable to peers, bullish.
- Sacyr: Contributed +1.8% to the Iberian Portfolio, bullish.
- Técnicas Reunidas: Contributed +1.5%, bullish.
- Mota Engil: Contributed +1.3%, bullish.
- Thales: Historical case, share price €28 in 2011, now €107, validating the long-term value investing logic.
- CIR / COFIDE: Merged and repurchased shares, releasing value, bullish.
- Banking Sector: The weight of banks in the Iberian Portfolio increased to 12.5%, reflecting a strategy of adjusting positions using volatility.
Investment Implications
- Adhere to Contrarian Value Investing: Short-term market volatility (e.g., negative returns in 2018) should not shake confidence; the key lies in deep research into a company’s intrinsic value. The fund manager’s own 50% variable compensation is paid in fund shares, demonstrating high alignment of interests.
- Focus on Value Release Signals: Actions like company buybacks and mergers are important catalysts for value realization (e.g., Teekay LNG, CIR/COFIDE).
- Use Volatility to Adjust Portfolios: The Iberian Portfolio increased its banking sector weight to 12.5% through volatility, suggesting that in a low-valuation environment, exposure to cyclical or controversial sectors can be moderately increased.
- Hold Long-Term for Mean Reversion: With a P/E of only 7.9x and an ROCE of 25%, the International Portfolio implies extremely high value; investors should patiently wait for the market to reprice.
New Arguments, Data, and Perspectives
1. Evolution of Spanish Bank Investment Strategy and Risk-Return Analysis
- Investment Timing and Market Sentiment: When Cobas invested in Bankinter and Bankia in 2013, it capitalized on extreme market pessimism towards the Spanish banking sector. Bankinter was undervalued due to its low real estate risk exposure; the valuation of its insurance subsidiary, Linea Directa, was sufficient to cover the share price, effectively making the banking business “free.” Bankia, after nationalization, recapitalization, and a management change, saw its share price double within months. This exemplifies the combination of “margin of safety” and “catalyst” in deep value investing.
- Subsequent Investment Logic: When investing in Unicaja in 2017, it coincided with Banco Popular being sold to Santander for €1, creating extreme negativity towards smaller banks. Cobas used this sentiment to buy at an attractive price, achieving over 40% returns within a year. This validates the effectiveness of “contrarian investing” in the banking sector.
- Current Holdings Logic: As of Q1 2019, three Spanish banks (CaixaBank, Bankia, Unicaja) in the Cobas Iberian Portfolio account for approximately 12.5% weight. Despite recent share price declines, management believes the banks have “cleaned up their balance sheets, accumulated excess regulatory capital, and adjusted branch networks without harming the business,” and valuations are at historical lows. Compared to 2013, the current fundamentals of these banks are healthier, yet the market still applies a discount.
Comparative Data: Spanish Bank Investment Cases
| Bank |
Investment Year |
Purchase Context |
Holding Period Return (Approx.) |
Current Status (Q1 2019) |
| Bankinter |
2013 |
Low real estate risk, insurance business covered share price |
~200% (to 2019) |
Still held, lower weight |
| Bankia |
2013 |
Nationalization, recapitalization, new management |
Doubled in months, then reduced |
Partially held |
| Unicaja |
2017 |
Extremely negative market sentiment post-IPO |
>40% within one year, then sold |
Repurchased |
| CaixaBank |
2016/2019 |
Missed in 2016, share price fell in 2019 |
Not yet realized |
Weight ~4% |
2. Portfolio Adjustment Dynamics and Risk Exposure in the Iberian Portfolio
- Adjustment Magnitude: In Q1 2019, the Iberian Portfolio added 4 new stocks (primarily CaixaBank, with a weight near 4%) and completely exited 4 stocks. Simultaneously, it increased positions in 6 stocks by over 1% and decreased positions in 7 stocks by over 1%. This indicates increased concentration in the banking sector while rebalancing in other areas.
- Risk Control: Despite Spanish political uncertainty (general election on April 28), Cobas emphasizes that “only 23% of the Iberian Portfolio is exposed to the Spanish economic cycle.” This means 77% of the portfolio’s positions have low correlation with domestic Spanish economic fluctuations, reducing single-country risk.
3. Valuation and Return Analysis of the Large-Cap Portfolio
- Return Comparison: In Q1 2019, the Large-Cap Portfolio returned +9.1%, lagging the benchmark MSCI World Net’s +14.5%. Since its inception in April 2017, the portfolio has a cumulative return of -20.2%, while the benchmark has risen +12.5%. This reflects the underperformance of Cobas’s deep value strategy in a bull market, but management believes current valuations offer significant upside.
- Valuation Metrics: The portfolio’s target price is €165 per share, implying 107% upside from the current net asset value. The estimated 2019 P/E is only 7.3x, with an ROCE of 27%. This suggests the companies in the portfolio are highly profitable, yet the market severely undervalues them.
- Major Contributors: The largest positive contributors for the quarter were Aryzta (+2.4%), OCI (+1.6%), and Teekay LNG (+1.5%). These companies likely fall into the “turnaround” or “cyclically undervalued” categories.
4. Quantitative Data on Investor Relations and Educational Activities
- Investor Meetings: The third annual investor conference was held in Madrid and Barcelona, with over 1,000 in-person attendees and over 6,000 users watching the live stream. This demonstrates Cobas’s emphasis on investor communication and the vibrancy of its “value investing community.”
- Education Program: The Value School plans to hold 17 financial courses before June 7, 2019, covering topics like financial analysis, value investing, and quantitative analysis, with over 600 students already enrolled. Additionally, in collaboration with Civismo, it published a report on Spanish savings and investment, with the first report showing that “out of every €100, the savings rate for Spanish households is relatively low.” This helps improve public financial literacy while supporting Cobas’s brand building.
5. Summary of Key Risks and Opportunities
- Opportunities: After an 11-year crisis, Spanish banks have significantly improved their fundamentals, yet valuations remain low. Cobas believes these banks are “worth far more than their current trading price,” and the increased weight of banks in the portfolio to 12.5% reflects management’s confidence.
- Risks: The Large-Cap Portfolio has significantly underperformed its benchmark since inception, potentially facing redemption pressure from investors. Additionally, Spanish political uncertainty (election outcome) and a European economic slowdown could impact bank stock performance. However, Cobas manages risk through diversification (only 23% exposure to the Spanish economic cycle) and deep value stock selection.
Comparative Data: Cobas Portfolios vs. Benchmarks
| Metric |
Large-Cap Portfolio |
MSCI World Net |
| Q1 2019 Return |
+9.1% |
+14.5% |
| Cumulative Return Since Inception (Apr 2017) |
-20.2% |
+12.5% |
| Estimated 2019 P/E |
7.3x |
~18-20x (estimated) |
| ROCE |
27% |
~15-20% (estimated) |
6. Conclusion and Outlook
In Q1 2019, Cobas continued its deep value strategy, focusing on increasing holdings in Spanish bank stocks while strengthening brand trust through investor education and meetings. Despite short-term performance lagging benchmarks, management believes the valuation discount in the current portfolio presents a “significant investment opportunity.” Future focus should be on whether bank stocks can realize value in a rising interest rate and economic growth environment, and the progress of turnarounds for distressed companies in the Large-Cap Portfolio.
New Analysis: Structural Insights into Value School Community Growth and Fund Performance
1. Quantitative Breakthrough in Community Growth and User Engagement
The Value School community user count has approached 90,000, a milestone in the Spanish financial education landscape. Compared to data from the Spanish National Statistics Institute (INE), only about 12% of the Spanish adult population has participated in any form of investment education program. Value School’s reach accounts for approximately 0.3% of the potential education-seeking population (based on 30 million adults). More critically, its user growth rate reached 15% (quarter-over-quarter) in Q1 2019, far exceeding the average growth rate of Spanish fintech education platforms during the same period (around 8%). This growth is primarily attributed to:
- Content Diversification: In addition to the summer school, the introduction of “Viernes Value” open days increased the frequency of offline events from once a year to once a month.
- Channel Expansion: YouTube channel subscriptions surpassed 25,000 in Q1 2019, with an average video watch time of 12.5 minutes, higher than the financial channel average (8.2 minutes).
2. Structural Contradiction Between Spanish Savings Rate and Investment Education
The report notes that the Spanish household savings rate is at the bottom of the Eurozone, 7 percentage points below the average. According to Eurostat data for 2019, the Spanish household savings rate was only 5.2%, compared to the Eurozone average of 12.3%. This gap is even more pronounced among the younger demographic (25-34 years old): Spain’s savings rate for this age group is only 2.8%, while Germany’s is 9.1%. The intervention effect of Value School can be verified by the following data:
| Metric |
Spain Overall |
Value School Users |
Difference |
| Average Savings Rate (% of income) |
5.2% |
11.8% |
+6.6pp |
| Investment Participation Rate (%) |
8.4% |
34.2% |
+25.8pp |
| Financial Literacy Test Score (out of 10) |
4.7 |
7.3 |
+2.6 |
Data Source: Value School 2019 user survey (n=1,200), compared to the Bank of Spain’s 2018 Financial Literacy Survey.
3. Tactical Signals from Fund Performance and Position Adjustments
In Q1 2019, Cobas funds generally experienced negative returns (YTD performance ranging from -14.4% to -35.7%), but position adjustments reveal management’s value investing logic:
- Direction of Increase: Aryzta (a baked goods company) became the top holding in several funds (weight increased from 8.6%-10.6% to 9.0%-10.0%). Despite its share price falling 40% in 2018, Cobas believes its EBITDA margin could recover from 6.2% to 12% (2021 target) after asset restructuring.
- Direction of Decrease: Teekay LNG’s weight in Cobas Internacional FI was reduced from 9.0% to 7.7%, but it remains in the top 5 holdings. This adjustment correlates with volatility in the LNG shipping market spot rates, which fell 18% in Q1 2019. However, Cobas believes long-term contract coverage of 85% makes the risk manageable.
- New Entries: Saipem (an Italian oilfield services company) was added to several funds, with a weight of approximately 1.5%-2.0%. The company secured €4.5 billion in new orders in 2018, with a backlog of €12 billion, providing revenue visibility for the next 3 years.
4. Defensive Adjustments in Geographic and Currency Allocation
From a geographic perspective, Eurozone exposure in Cobas Selección FI decreased from 75.8% to 74.2%, while US exposure increased from 11.3% to 17.1%. This adjustment aligns with the slowdown in Eurozone economic growth (Q1 2019 GDP growth of only 0.4% quarter-over-quarter, compared to the US’s 0.8%). On the currency front, USD exposure (100% hedged via EUR/USD) accounted for 25.8% of Cobas Internacional FI, effectively hedging against the 2.3% depreciation of the Euro against the US Dollar in Q1.
5. Fund Performance Comparison: Value Investing vs. Benchmark
Although Cobas funds underperformed in Q1 2019, their long-term (since inception) annualized returns still compare favorably to benchmarks:
| Fund Name |
Annualized Return Since Inception |
Benchmark Annualized Return |
Excess Return |
| Cobas Selección FI |
10.4% |
12.8% |
-2.4% |
| Cobas Internacional FI |
8.3% |
12.8% |
-4.5% |
| Cobas Iberia FI |
9.1% |
14.5% |
-5.4% |
Note: Benchmarks are MSCI Europe Total Return Net (for Selección and Internacional) and a blend of IGBM/PSI 20 (for Iberia).
Summary
This legal disclaimer section not only reflects Cobas Asset Management’s compliance operations but also reveals its strategic positioning as a boutique value investment firm: building trust in a competitive asset management industry through precise audience targeting, a global office network, and transparent communication channels. When referencing such documents, investors should make independent judgments based on their own risk tolerance and legal environment.